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Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

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All investing is subject to risk, including possible loss of principal.

For many years, the government has published statistics on Americans’ age and employment. A version of that data is shown in the chart below. My sense is that these figures are the basis for much of the conventional wisdom on the age at which people retire, as well as for whatever general notions people have about when they’ll start to need “replacement income.”

According to these numbers, less than half of the population is working at ages 62–64, and less than one-third is employed between ages 65 and 69. This implies that there are a lot of youngish retirees out there with a need to “replace their paychecks” in their mid-to-early 60s.

Given these numbers, and that need for income, you might logically expect that many people would start to draw down their IRAs in their mid-60s. But in fact, we don’t typically see that at Vanguard. What’s more, the Investment Company Institute recently issued a report looking at IRA ownership and withdrawals and found that 81% of IRA-owning households ages 59–69 did not take a withdrawal in 2009.

So what’s going on? How are IRA owners ages 65–69, a large fraction of whom are not working, making ends meet?

No doubt Social Security checks play a big role, as do traditional pensions for those who have them. But I suspect it’s something simpler: There is a big difference between individuals and households, and I’d argue that retirement, for many, is a household phenomenon. You can see this difference in a set of figures from the government’s report that look at the incidence of earnings for households (not employment per se, but rather the fraction of individuals or households who report receiving earnings from work).

Source: Purcell, Patrick. “Income and Poverty Among Older Americans in 2008,” Congressional Research Service. October 2, 2009. Table 1, page 4, and Table 2, page 5. Households categorized by age of the older of the householder or householder’s spouse.

The data show something that may be surprising: The numbers for individuals appear to track the employment numbers above pretty well, but nearly three-fifths of households where the older householder or the householder’s spouse/partner is aged 65–69 are still receiving some income in the form of earnings. Over a third of households in the age 70–79 category are receiving some earnings from work.

Though it’s true that IRAs are individually owned, I’d suspect that a large part of what we see in terms of withdrawal behavior reflects at least a reasonable degree of coordination among household members in managing finances and making decisions about withdrawals. If there is still one member of a couple working, perhaps between that and Social Security, many families feel like they earn enough to get by without spending their savings. Even if some spending from savings is needed, tax planning is likely a consideration. In many cases it can make sense to put off spending IRA assets as long as possible in favor of using other sources.

But this is a lot of extrapolation/speculation/fantasy, based on some aggregate stats. So, let me ask you out there in the real world: Among those of you who are retired, when did you start taking money out of your IRAs? Did you coordinate with a spouse or partner? How did things change once you hit 70½ and then had a requirement to take money out of your retirement accounts?

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John Ameriks

John Ameriks oversees the Active Equity Group within Vanguard Equity Investment Group, which manages active quantitative equity fund assets. He is one of Vanguard's thought leaders on retirement issues and has conducted studies on a wide range of personal financial decisions, including saving, portfolio allocation, and retirement income strategies. John came to Vanguard in 2003 from the TIAA-CREF Institute, the research and education arm of TIAA-CREF. He graduated from Stanford University with an A.B. and earned a Ph.D. in economics from Columbia University.

Comments

Anonymous | June 3, 2010 1:00 pm

My wife and I retired at 55 and both of us receive Calif. state pensions. We have no debt and own a motorhome and a home in AZ. Our pensions cover all of our costs easily and provide enough extra money to do almost anything we want (within reason). When my wife’s Social Security starts in November it will add to the amounts we are saving now (3K/mo.). Our IRA is a safety net for unforeseen future costs and I suspect we will not take any funds out until required to do so. We remind ourselves regularly regarding how fortunate we are.

Anonymous | June 3, 2010 12:59 pm

I’m still working at 68 and my younger wife is retired. Between SS and my wages, and her savings, we don’t need to tap IRA/401Ks yet. Maybe I’ll quit when I reach 70. Healthcare has a lot to do with it, since my wife is only 58 and not yet eligible for Medicare. If I quit she’ll have to go to the individual market with one of the insurance companies. We all know what a ripoff that is.

Anonymous | June 3, 2010 12:59 pm

I am 74 so have had to take RMDs for the last few years but not in 2009. This has not changed our standard or style of living. After paying taxes on the RMDs, the residue has either been re-invested in taxable vehicles, or been gifted to a younger family member. Neither my wife nor I have had wage/salary income for a number of years.

Anonymous | June 3, 2010 12:58 pm

I retired at 62, my wife was a stay at home mom. I bought a small business at that time that I ran for about five years, then sold when I was ill with cancer. I am now 77 and live mostly on SS and investment property income. I’ve had to take MRD, but have mostly rolled it over into mutual funds. I still have some modest income, about $30,000 per year, from corporate directorships. I have invested almost all that income with Vanguard in a company sponsored Rabbi Trust.

We have always been frugal, living well within our means from day one of our marriage 52 years ago. As a business school professor I bootlegged in a two week course in all my regular senior and graduate course classes. I pushed frugality, Vanguard, starting early, monthly savings,dollar cost averaging, no debt other than mortgage (with 20% down and 15 year amortization), diversification, term life, and 529 plans for their children. At least a few are following my advice as are, to some extent at least, our four children. I appreciate what Vanguard and TIAA-Cref have done for us. Thank you!

Anonymous | June 3, 2010 12:57 pm

I retired 4 years ago at 59, and my wife, 62, is still working as a school teacher but may retire early next year. When I first retired, we lived off my pension, interest (about$500/month) from a CD and wife’s income. This was the same “take home” income I had when I was working. At 62, I started drawing my Social Security and I had more “take home pay” than when I was working. I was reluctant to draw from my 401k but realized I could take 4% and maintain my principle, so this year I started taking that 4% and that extra income put me in the 25% tax bracket. I look forward to turning 65 so I get another tax exemption. I still contribute $6k to my Roth at Vanguard annually. I think I should have started drawing the 4% sooner. It took me a while to get used to the idea of drawing from the 401k. I will stop contributing to my Roth next year. We are planning more elaborate trips abroad.

Anonymous | June 3, 2010 12:57 pm

i am semi-retired for 6 years and still work part time. my wife still works full time. between my company pension,social security and part time work i have not had to draw my ira. i reinvested my rmd this year into my roth ira(vanguard). also my house and car are paid for.

Anonymous | June 3, 2010 12:53 pm

Anonymous | June 3, 2010 12:52 pm

I am almost 67 years old, I retired at 52 from the military. Between my pension, social security for both my wife and me, and investment income there has not been a need to tap into our IRAs. We would like to be able to pass assets of our IRAs to our children.

Anonymous | June 3, 2010 12:51 pm

I retired two years ago at age 61 with a severance package that payed out at my previous salary for 18 months, my wife now 58 continues to work but hopes to get the same deal (we both work for the same company) in 2011 at age 59.5. I receive SS now and at the end of her severance period she will be elegible as well. We hope to have about a 50/50 income balance in retirement between SS and Distributions. For us it’s been a balance between exiting the work force and starting our “golden years” asap, while at the same time allowing for recovery of our portfolio. We find that being debt free and having just moved to a “Sun City” community where we own our home outright to be the biggest comfort as we look to the years ahead. In closing let me echo a note from a previous contributor, does Vanguard offer advice as to when one should start distrubitions, and a formula that could be employed to guide us. One more thing, I notice that many people here stated that they re-invest their RMD’s, is that a good stratagy and if so what are the best vehicles to place those monies in?

Anonymous | June 3, 2010 12:50 pm

My husband is 66 and I am 59. He was ‘forced’ to retire at age 65 (police officer) and I was disabled at age 57. Between his pension and my ss disability we have no need to tap our IRA’s or my 401k yet. His pension is fixed and will never increase so we anticipate making withdrawals to retirement savings accounts in about 5 yrs depending on inflation. Notice a LOT of folks here have pensions.

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Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.